Wednesday, May 23, 2007

Three Down Days in a Row

Market Action:
Wednesday did provide some market action that seems worthy to present here. Let us recall that the Dow has now been down three days in a row and four out of five days. While the down price is not very much, the price break could still be important.

For whatever reason, and that could be just because it was Wednesday, the stock futures were up before the opening bell. The trading in the first hour pushed the Dow up about 70 points to a new record trading high. And, for the first time in this run, the SP 500 managed to trade above its 2000 high. But, both indexes closed down on the day.

With about two hours to go in the trading day, the market sold off, taking the NASDAQ 100 down 12 points on the day but 20 points down from the highs. So, here we are in the middle of the week and we have another signal from the market that all is not so well. The up trend line that was in place for about a week has been broken and with it, stock prices are now in a questionable place.

Normally, breaking the trend line gives us a little instantaneous move in the opposite direction, which we got on Wednesday. Now, the question is, “Does this break set us up for the next move down?”

We have been patiently waiting for the market to turn down and each time we think there has been a signal from the market, we get an upside reversal. On Wednesday, the market gave us this new direction that may last or may not. Some follow through would give us some more confirmation that the market is ready to go down.

With the voices in the news so bullish, and our technical indicators so weak, we can’t say that we would be surprised with a down move since we have been expecting it for the last several weeks. But, it would make us feel better about our analysis.

We continue to hold our bearish positions, with great pain, but we think that any other course would lead to bigger problems.

Deflation Part Three:
Since the market did provide some entertainment on Wednesday we will keep this section brief this evening.

In Part Two we discussed the global liquidity madness and tonight we would like to provide a little more information. As the US expanded its debt and its trade deficit there was an unintended consequence, world wide credit expansion. With a number of countries tying their currency to the US currency, they had a need to follow the US in the expansion of their own currency.

If you look at the dollar value from its recent high in 2001 to its low in 2005, it dropped approximately 1/3 in value from 120 to 80. This happened to be the same period of time that the Fed was lowering rates to 1% which as we have been reporting is one of the reasons for the dollar’s fall.

Importantly, the currencies that were/are pegged to the dollar had to follow suit and match their currency expansion to the dollar at least somewhat which helped increase credit expansion in those countries as well. Eventually, it seems the whole world has been expanding credit and all manner of assets have been going up except for the dollar of all things.

It remains our position that the dollar will now find some way to rally as it will again be sought after and this will be the start of the great deflation that we have been expecting ever since the housing market started to fade.

Dow Industrials: 13,525.65 -14.30
VIX: 13.24
HUI: 329.41
QQQQ: 46.83
QQQRS: 0.21 bid
QQQRT: 0.39 bid
RYVNX: 15.07
RYAIX: 20.38
RYCWX: 30.77
TLT: 86.49
BEGBX: 13.78

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